The Deficit?Interest Rate Connection: an empirical assessment of the EU

Carlos Vieira

Economics Working Papers from University of Évora, Department of Economics (Portugal)

Abstract: The progressive deterioration of public finances in most developed countries, during the last two decades, prompted an extensive discussion on the effects of government deficits on the interest rate and, consequently, on employment and economic growth. The empirical literature, largely focused on the US, is far from conclusive. This paper examines this relationship in six core EU countries using non-causality tests, including the recently proposed LA-VAR test. The evidence suggests that, contrary to the conventional economic theory, no causal effect from the deficits to the interest rate can in general be found. On the contrary, the econometric tests highlight the preponderant negative consequences of high interest rates on the government total deficit.

Keywords: deficits; interest rates; causality; LA-VAR test; European Union (search for similar items in EconPapers)
JEL-codes: E43 E62 H62 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2004
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:evo:wpecon:5_2004

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